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Project Finance

Q1. For this captive mine power plant, what contract structures would you expect to see in the Power Purchases Agreement? (From the perspective of Lomond Power)

The Power Purchases Agreement should cover the following items to make the certainty of the contract to mitigate the market risk.

Term: the project’s output is only sold to one offtaker, Maud Gold Mine. The strength of offtaker and its technical or strategic are assessed. The term of PPA is based on the life of Maud’s Gold Mine. Hence, the term of the contract is 12 years. The condition and amount about bonuses and penalties should be including in the PPA.

Project Date: commencement and completion date. This also includes the transition during commissioning.

Quantity of the product: since App proposes to use an LM6000 aeroderivative gas turbine packages which can produce 32-36MW from the S&S package. The capacity assurance S&S guaranteed the 95% availability

Price & Payment: the price should also be included in the Power Purchase Agreement to mitigate the market risk. And the payment method should also be included, such as: ESA or annuity.

Security and default: If completion is not achieved by a fall-out date, then completion guarantees and other supports may be triggered by a default. If fail to pay the interest and repay the debt, then legal security may be exercised.

The financiers have right to get indemnity from the delay-in-startup and liquidated damages insurances.

Risk taker: the PPA should also cover which party takes what kind of risks. The general rule is that the party who can deal with it should take the risk. And the Dispute resolution should be including in the PPA in order to deal with the dispute once something in the contract goes wrong. PPA should make-up method when force majeure deferral occurs.

Q2. If you were to specify the scope of work for an Independent Engineer, what would you include as the top five items to be considered? What five matters would you inspect in the Maud’s Feasibility Study?

An independent engineer plays an important role in these circumstances.

1) Obtain project scope documentation such as: PPA & site visit

2) The role of an independent completion engineer will be important not only o monitor completion but also issue an “Anticipated Cost to Complete” report with each drawdown.

3) The financial models that an independent engineer used should also be checked, such as IRR or payback period to mitigate the model risk.

4) It also checks the integrity of the contractual architecture, not just the “slide rule” checks.

5) It is a key bridge in getting the performance completion test procedures that the project financier wants.

There are five standard independent checks required on all feasibility study.

• First is the environmental review. It is necessary to assess the ability of the Maud’s Gold Mine to meet tightening compliance standards over time. This requires not only examining the environment impact assessment, but also checking policy and sociological issues as well.

• Second is the legal opinion. The legal opinion should be a legal volume in itself and should stand without disclaimers or exclusions.

• Third is tax risk. For every project, the tax risk in each jurisdiction needs to be examined.

• Forth is accounting and audit. Some checks of the tax routines and modeling should be done.

• Fifth are insurances. The insurances often induce legal risk due to the peculiar wording of most policies and insurance jargon.

Q3. Given the role of S&S in the construction and operation of the plant, what information would you want to be satisfied with from S&S engineers / corporate executives.

APP made Turnkey Construction and Operations & Maintenance contract with S&S. the S&S provides full completion support via Liquidated Damages and Delay-in- startup insurance. Therefore we want get clear information about the completion test which measures whether the project has been build on time and at budget and is capable of producing the CFs that were originally projected during the loan application phase. The construction contract is a tool to control costs and construction performance. The term “turn-key” means that the constructor takes all the risks until the sponsors turn the key to start up the project. We want a fixed-in-time and fixed-in-price contract.

We also need to know the condition and term and size of liquidated damages, which have two main components: delay and underperformance. Delay is calculated as fixes amount of dollars per day, up to a limit. Underperformance is measured over a sustained period to give S&S time to rectify performance. If the problem persists, a single fixed payment is made.

Q4. Is the plant configuration acceptable from a Supply/Market risk point of view?

Market risk occurs when the sales price falls, market share drops and demand for a Project reduces. However, in the Lemond Power Cash, the plant configuration is acceptable because there is a long-term power purchase agreement with Belle Mining NL. The long-term term contract extends beyond the end of the loan life. If the sale price and quantity of product are fixed in the agreement, the market risk is avoidable where the agreement existing.

From the supply risk point of view, the plant configuration is also acceptable because there is the fuel supply contract with Santos. If the contract also extends beyond the end of the loan life and Santo can provide the fuel at the fixed price and quantity, the supply risk also might be avoidable.

Q5. Are there any aspects of the “deal concept” that make you uncomfortable?

For every project, there should be six basic project contracts: concession agreement or license and approvals; joint venture or shareholder agreement; management agreement; turn-key or construction contract; supply or offtake agreement; and site lease. However, in this cash they miss some basic agreements.

1) There is no site lease agreement or approvals provided by local government for the power plant.

2) There is no management agreement via a management company or through a management committee under a UJV. The project financier will be keenly interested in the scope and power of the manager and the ability to replace the manger if the project gets into difficulty or is sold.

3) The S&S provides the construction and O&M service together. It is not easy to control the quality of operation.

4) There is no bank to provide performance bonds to the Lemond Power and also guarantee that the contracted amount of LDs will be paid to APP.

Q6. From a Funding or Interest perspective, give one or two methods that could be applied to lower the interest rate expense.

There is one method could be applied to lower the interest rate expense Swaps- find a counterparty to convert the floating interest rate payment to a fixed interest rate payment.

However, The problem of this method is whether the cost of the swap & floating rate loan combination cost is lower than original loan. Also the interest rate swap is short term in nature. Hence it requires a rescheduling.